Sustainable Finance needs Fintech

Swiss fintech has many of the solutions for the key challenges with data

Finance and technology are key pillars in constructing a sustainable future, and Switzerland offers the building blocks. Capital held by asset owners needs to find its way to the most promising sustainable tech innovations developed by scientific, academic, and corporate bodies. Scientific innovation in industry needs to be funded with investment and the finance sector plays a key role in channelling capital to the deserving projects. But for the finance industry to give guidance on these sustainable projects, it too needs to sift through and understand the sustainability space. Indeed, to achieve the Swiss Federal Council goal of reinforcing Switzerland’s position as a leading location for sustainable finance, technology must be part of the solution.

Can’t see the wood

The finance sector needs to make the most of technology to efficiently meet the challenges of sustainable goals: a key problem lies in the lack of clarity in the vast jungle of information surrounding sustainable finance. It’s all too easy to get bogged down in the detail of this and that data point and losing sight of overarching goals. In the meantime, financial institutions also face an obligation to ask investors about their sustainability preferences, so the problem is becoming pressing.

Data and technology are key to sustainable finance. “Companies are demanding more from their technology and data vendors”, concludes SIX Financial Information in their 2023 Cornerstones for Growth (1) publication.

Proof of Swiss intentions comes in a fresh study from the Lucerne University of Applied Sciences and Arts (2) which confirms the attraction of Switzerland for fintechs and indeed showed a 23 per cent increase in 2023 of firms with a specific sustainability focus. Switzerland is becoming a centre of excellence at the crossroads of finance, technology, and sustainability.

Aches and pains that hurt

Swiss fintech is stepping up to the challenge and some of the solutions and developments are explored below, but first, let’s look in a bit more detail at some of the hurdles faced by sustainable finance professionals.

First, there is the topic of data availability and quality. Accessing reliable, comprehensive, and standardized data remains difficult, hindering decision-making. Indeed, most market participants found data quality to be a primary hurdle, according to a fresh Bloomberg study (3).

Secondly, there is a great deal of complexity and interconnectedness in the data. A constantly evolving data landscape can make managing ESG (Environment, Social, Governance) datasets frankly a nightmare. It also poses challenges when linking content to existing data systems. Sustainable finance involves complex systems with numerous interconnected factors, especially in supply chains, making it tough to accurately measure and predict outcomes.

Third, regulation is fluid. Rules frameworks governing sustainable finance are evolving rapidly, leading to uncertainty and compliance headaches for financial institutions. Regulation constituted the single biggest priority for market players to address, according to the Bloomberg study.

Fourth, and in terms of managing risk associated with sustainability factors such as climate change and social inequality, this also presents challenges. Effective risk management of non-financial factors in particular, requires sophisticated modelling and data analysis capabilities which move beyond the conventional risk management tools used by financial institutions.

Finally, the transparency of information, which is driven by stakeholders’ expectations and regulatory requirements, can be difficult to achieve especially in supply chains where contractors, distributors and a multitude of suppliers sometimes in the hundreds or even thousands might be involved. This in turn makes accountability difficult to assign.

Robots and algorithms

Plenty of challenges to tackle then. But having identified some pain points above, how might they be addressed? Technology provides solutions through data analytics, automation and scientific tools that make sense of this ‘vast pool’ of information.

Let’s look at some ways in which the Swiss fintech space is working to solve the problems.

Machine learning trained on large language models (LLMs) and using natural language processing (NLP) along with other AI tools help analyse massively enlarged datasets to identify patterns, trends, and correlations, improving decision-making processes. Several players have developed solutions that critically analyse information flows and support the investment decision process especially by identifying sustainability risk factors, often bucketed into the three high-level ESG elements. RepRisk, a Zürich stalwart with nearly twenty years in the field, and Yukka Lab, a more recent player, provide data science solutions for a broad spectrum of sustainable finance purposes.

DLT, or blockchain, can improve transparency, traceability, and accountability of data, enhancing integrity and trust in the information pool. DLT is adopted in the development of digital tokenised assets at, for example, SIX Digital Exchange (SDX), where green and sustainability bonds are tracked to verify that the appropriate sustainable objectives of the proceeds are met.

Integrating climate risk into financial analysis, institutions can better manage their exposure. Zürich-based First Climate, for example, became a pioneer in environmental asset management over two decades years ago and through technology, science and finance offers solutions for sustainable investment decisions. South Pole, another Zürich-roots company, supports financing projects that deliver positive climate impact.

Innovative fintech solutions for sustainable finance, such as green bonds, impact investing platforms, and carbon footprint tracking tools broaden access to sustainable investment opportunities and empower asset owners to align their financial goals with their values. A good example of facilitation in the innovation space is Tenity, which puts a strong focus on accelerating startups in the climate fintech industry. Further, the use of AI can vastly improve the speed of adaptability to evolving regulation and ethical and legal standards.

Generative AI, in turn, has the potential to interpret legal text in real-time (and faster than the average lawyer), but it can also stress test and run scenarios on the impact of regulatory changes in the sustainability space.

Finally, collaboration between financial institutions, fintechs, policymakers, academia, and civil society drives innovation and results in improved social development and economic benefit. There are many examples of strong collaboration and to name but a few, the Swiss State Secretariat for International Finance (SIF) established a working group in 2020 whose first goal is to bring together corporates, academia, fintechs and all players in a green ecosystem. Among academic institutions are the University of Zurich Center for Sustainable Finance and Private Wealth, and non-profits include the Green Fintech Network.

There certainly are significant information challenges in sustainable finance but technology offers immense opportunities to enhance transparency and improve decision-making by scaling technological innovation effectively.

With more than 300 members, the Swiss Finance + Technology Association is here to help make the most of the Swiss fintech ecosystem when building sustainable solutions.

Sources:

Swiss fintech has many of the solutions for the key challenges with data

Can’t see the wood

Aches and pains that hurt

Robots and algorithms

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